…if the stock you purchased is up more than 30,000% from your purchase price?
A common and a sensible reaction would be to sell it immediately & celebrate. If I would have been in your place, even my first reaction would have been the same. And more so if this appreciation had taken place over a very short period of time. But this particular one took almost 25 – 30 years.
One of my relatives called me up last night for a general chit-chat. Since he is into long term investing, or rather passive & lazy kind of investing, we generally end up talking about stocks much more than anything else. And this time was no different.
He told me that since markets had run up so much due to election-induced-euphoria, many in his friend circle were asking him to sell this ‘mega-multibagger’ now. As mentioned above, he was referring to the shares of HUL which were a part of his portfolio. Adjusting for various bonuses, splits and dividend re-investments in last few decades, his average cost per share worked out to be less than Rs 2.
And the stock is currently trading at around Rs 580!
And as mentioned in the title of this post, this amounts to a un-booked paper profit of more than 30,000%
Now the question is, why isn’t he selling his shares? That to after a rise of more than 30,000%!!
In 2013-14, HUL paid/announced a dividend of Rs 13 per share.
So what does this information have to do with the decision to sell (or not) a stock which is already up more than 30,000%?
This means that my relative is earning a monstrous dividend yield of 650% per year, i.e yield-on-cost. Yield-On-Cost is the dividend yield of a stock on its purchase price.
Sometimes, its the only button you need on your Wealth Keyboard
For a stock having an effective purchase price of Rs 2, a dividend of Rs 13 every year means a yield of 650%. And since HUL generally pays dividends which increase with time, it is highly probable that this yield-on-cost will continue increasing in future too.
Now where else can you find an investment, which pays 650% every year?
And that is the reason my relative is not selling his shares. The logic which he gives is an extension of previous statement. If he sells his shares of HUL, it would be impossible for him to find an asset class which would provide him with such phenomenal annual returns.
Comparison of Annual Returns by various assets ** HUL in this particular case
And this makes a lot of sense.
Though I call myself to be a long term investor, I still think that it is really, really tough to buy stocks and keep them for more than 25-30 years. Really, I am proud to be a relative of this person. 🙂
You can read my article on the concept of Yield-On-Cost in world famous value investing website Old School Value here.
Do you believe in long term investing? Or is it that you do not believe in short term trading?
Irrespective of what you and I believe in, the fact remains that it’s a big mistake to simply ignore short-term(ism). Short term trading can deliver quick returns. Period. But are these (eye-popping) short-term performances sustainable over long term? And why is it that after every crash (2000,2008, etc), it is the traders who are wiped off and it is the long term investors who are not? There must be some reasons why traders have such high (market) mortality rates?
Lets look at it from another perspective. When we talk about investing or trading, what we are indirectly referring to are the time horizons. Now these time horizons are relative. Your long term can be short term for someone else. One of my close relatives has been investing for last 30 years. According to him, anything less than 10 years is short term!! And just one of the stocks in his portfolio happens to be HUL (Hindustan Unilever Ltd). After adjusting for bonuses, splits and dividend re-investments, his average price per share works out to be Rs 2.00/- (No…it’s not a typo); and HUL is currently trading at around Rs 570. Add to it the current annual dividend of Rs 7.50 per share. i.e. He has a capital appreciation of 28,400% and earns 375% (on his original investment) in form of dividends every year. Now can a trader match that? That too, year after year? One may argue that one can. But figures like 28,400% & 375% make it really hard for traders to challenge this long term investor’s approach of terming anything less than 10 years as short term. 🙂
Now these time horizon also depends on one’s risk appetite. It is a known fact that in short term, markets are volatile i.e. risky. So if one cannot take much risk, then he is not suited for short term trading. He is better off investing for long term by picking upgood, solid companiesorinvesting systematically in mutual funds. The longer you have to invest your money, the bigger risks you can take. If you need money in next few years, you should take a more conservative approach and put it in banks or other safer investment products like Bonds, RDs, FDs, etc.
For an average investor like you and me, anything more than 5 years can be termed as long term. Five years is a long enough time to assess whether a company is doing good or not. I personally define my long term as more than 10 years. What about you?
Disclosure: No positions in shares of companies mentioned above.
HUL is an example of a great business. It has a portfolio of famous FMCG brands that every Indian uses atleast once a day. Who wouldn’t recognize Lux, Lifebouy, Kissan, Rin, Surf, Axe, Close Up, Dove, Fair & Lovely, Sunsilk or other HUL brands? With Indian growth driven primarily by domestic consumption, there is no question whether HUL, with all its powerful brands, is well positioned to take advantage of this growth or not. Even respected stock research houses are claiming that ‘HUL is on a path of sustainable growth with the help of its powerful & diversified brands and thus they maintain a Buy rating on the Stock once again.’
HUL – A good buy?
But we beg to differ from everyone here. We are not convinced that HUL is a good BUY at this price. With HUL at Rs 530, there are some facts which suggest that it may not be the best time to buy this stock:
HUL is commanding a P/Emultiple of 50. This is highest multiple it has ever commanded. FMCG companies generally trade at high PE multiples. But a PE=50, doesn’t seem sustainable.
With a 3 year growth rate of 4.63% in Sales & 2.02% in Profits, a P/E of 50 does seem irrational.
If we check HUL’s PEG Ratio with Current PE=50 & G=15% (though past records stands at less than 5%), we get a PEG=3.33. And a stock having PEG>1 is considered to be overvalued.
Another way of looking at PE=50 is that investors expect HUL to grow at 50% per year in future. And common sense says that this is insane. With a company of HUL’s size, a 50% growth rate is like Elephant running at 300kmph!! 🙂
So what are your views?
Disclosures: No Positions in HUL. But if we had already purchased HUL years ago and had big capital gains built into the stock, we wouldn’t sell it even if it was overvalued. This is because we believe in power of doing nothing in stock markets. 🙂